Exempted sectors in free trade agreements

Abstract Almost all participants in free trade agreements (FTAs) exclude at least a few products or sectors from complete tariff removal on the exports of their FTA partners. The positive tariffs that remain within an are often highest countries apply MFN basis. It seems plausible such exclusions may be chosen because domestic producers these viewed as especially vulnerable to competition imports partner country. In brief, they “sensitive sectors.” We develop this idea theoretically and then test it empirically data 37 240 importer–exporter pairs FTAs. find support for sensitive‐sector hypothesis only high‐income countries. low‐income countries, contrast, exempt where bilateral would more likely trade‐diverting therefore harmful. Our explanation this, supported empirically, is not following advice economists, but rather avoiding loss revenue also perhaps influenced by greater bargaining power richer and/or larger partners